By Ed Davey MP - 12th September 2012
Ed Davey, Secretary of State for Energy and Climate Change, writes for Central Lobby about some of the myths surrounding the forthcoming Energy Bill.
Seven months in as Secretary of State and I’m more aware than anyone that the energy and climate change agenda raises passions.
It goes right to the heart of what we all hold dear – how we power our economy, how we lead our lives and the state of the planet we live on.
These are long term challenges that demand long term action. That’s why the forthcoming Energy Bill is so crucial. Few things can be more important than keeping the lights on, bills down and the air clean.
The reforms are designed to address a basic problem in our energy system: demand for electricity is projected to rise, but a fifth of our power plants are closing.
In the next ten years, we must secure some £110 billion of investment in electricity infrastructure.
That investment must go into low-carbon supplies, so that we can meet our legally binding targets.
To give you a sense of scale, £110bn is 7 times the investment Crossrail will bring to London; or every year until 2020 it’s like building 20 Olympic Stadiums.
So we’re proposing new long-term contracts for low-carbon electricity supply – feed-in tariffs with contracts for difference. We’re also introducing a new way of ensuring we have enough back-up power, an emissions performance standard to limit emissions from new fossil fuel power stations, and arrangements for transition from the current system.
The Coalition introduced these reforms nearly two years ago. We’ve published a white paper, and a technical update; we’ve consulted industry and the public extensively; we’ve held workshops, convened expert groups, and introduced a draft Bill for pre-legislative scrutiny.
But this is a big piece of legislation, and there are still rumblings that the Bill is off-putting to investors. So let us look at some of the misconceptions about the Bill that are doing the rounds.
As I see it, there are five myths that need to be knocked down:
1. It’s too complicated.
2. It’s too statist.
3. It’s a nuclear subsidy in disguise.
4. It’s only going to make the Big 6 bigger.
5. It’s unnecessary, because there are better ways of achieving our aims.
The first myth is that the Energy Bill is just too complicated, scaring off new sources of capital, and working against new entrants.
I believe feed-in tariffs with contracts for difference are trusted by investors. I’ve spoken to global fund managers who’ve say that the uncertainty of the current arrangement put them off investing, but that CfDs give them the predictable revenue streams they need to invest in big projects.
By providing long term price stability for all forms of low carbon electricity generation, they bring down the cost of capital, allowing more investment to come forward sooner.
Global companies and investors are already used to working across different regulatory regimes. And it’s not like our model is an unknown quantity: Canada used a CfD to finance the recent upgrade of a nuclear plant, the Netherlands use a top-up feed-in tariff model for renewables, and Denmark use something similar to pay for electricity from offshore wind.
The second myth says that our reforms are too interventionist; that it’s a case of government picking winners and fixing the market to suit them.
According to this line of argument, the Energy Bill is a dirigiste throwback, a planned-economy solution to a free market problem. I reject that, because I think it misunderstands both the reason for reform – and the timescale.
The case for intervention is clear: markets have failed to properly account for carbon emissions. The carbon price is not high enough to drive serious low-carbon investment at the scale we need. That’s why there is already significant intervention in the market, from the Renewable Obligation, to Emissions Trading Scheme.
The reforms in the Energy Bill are specifically designed to move us away from such intervention - and blaze a trail towards competition. That is their ultimate aim.
Of course I’d love to see low-carbon power sources competing on cost alone. But the playing field is far from level, and we can’t simply bulldoze it flat. So our reforms are phased.
First, we’ll introduce contracts for difference; with prices set administratively.
Then, as different technologies mature and start becoming more cost competitive, we’ll see the first technology specific auctions.
When all technologies have matured, we’ll move to technology neutral auctions. Demand side response, and additional storage and interconnection, will play an increasingly important role.
Finally, when all technologies are mature enough and the carbon price is high enough, all generators will compete without any intervention. The move from price setting to price discovery will be complete, with low-carbon electricity sources competing on cost to provide clean, affordable, secure energy for UK consumers.
The third myth is that EMR is a stealth subsidy for the nuclear industry.
Nuclear has an important part to play in the mix, but it will be for private companies to construct, operate and decommission nuclear power stations. There will be no public subsidy for new nuclear power, unless similar support is made available for other types of low-carbon generation.
Of course different energy sources respond to different incentives. So we’ve looked at our model to ensure that it suits both intermittent and baseload technologies. But - and I cannot stress this enough - this tailored approach applies to all potential sources of electricity.
The fourth myth says that our reforms won’t open up the market and encourage new entrants.
I think we’ve been pretty clear that a key aim of our reforms is to encourage new entrants and new sources of finance. Participation and diversity is vital to a truly competitive market, and consumers will get the best deals when suppliers face hard competition. So we are working with the regulator to strip away barriers to entry.
Ofgem are taking forward a proposal to address liquidity in the wholesale electricity market. And my Department is looking at other barriers, such as the way independent participants secure long-term contracts to finance projects.
We’ll be reporting our findings in the autumn, and where necessary, we’ll act to remove structural barriers to entry that aren’t addressed by Ofgem or market-led initiatives.
The last myth I want to knock down is that there are better, cheaper, easier ways of securing investment, cutting carbon and keeping the lights on. That our reforms are unnecessary, because a global glut of cheap gas will solve our investment and carbon problems.
Let’s get one thing straight: I am not ideologically wedded to any energy source. I want a diverse, secure energy mix that allows us to decarbonise our economy at an affordable pace.
We know gas will play an important part in our energy system for many years to come. We see a clear role for gas in the medium term, not just providing backup electricity, but baseload too. Our Carbon Plan projects some 10 to 20GW of new gas generation coming online in the next two decades, a figure we are revising regularly.
So gas is a key part of our energy economy, and will remain so for the foreseeable future. But we should think carefully before buying the argument that says we can achieve our aims simply by switching to gas, for two reasons.
Firstly, because although gas is much cleaner than coal, it still carries a carbon impact.
Our numbers show that we can accommodate around 30 to 45GW of unabated gas over the next twenty years and still hit our carbon targets, but any further fossil fuels will need CCS, which is not yet commercially viable.
And secondly, because gas is an internationally traded commodity, its price can be volatile. Wholesale energy costs already account for more than half of the average energy bill. Last year, global gas prices rose 40%, putting consumers under real pressure. Some surveys show rising energy costs are the top financial concern for most households.
Yes, prices can go down, as well as up. And yes, unconventional gas can make a difference, although perhaps not as big a difference as some sections of the press would have me believe.
The International Energy Agency predict shale gas will double its share of the market by 2035, but that will still account for barely a third of global demand.
Analysts think shale gas extraction in Europe will be more expensive than in the US, and probably won’t happen at scale until the end of this decade.
And we’re competing with fast-growing economies which are hungry for gas. Demand in the Middle East is rising steeply; the IEA think it will rise 20% in the next five years, outstripping supply. China alone is expected to double its demand by 2017. No wonder the consensus is that gas prices will either remain high, or go higher.
So yes – gas has a key role to play in meeting our energy security and climate goals. But this is in conjunction with renewables, nuclear and other low carbon sources, not instead of them.
We need an electricity market that can take advantage of all kinds of cheap clean energy sources, without tying ourselves to one in particular. That is why I believe our reforms are the best solution to the unique challenges we face – falling supply, growing demand, and carbon.
And there are real benefits on offer: Up to 250,000 jobs as energy infrastructure is upgraded; household energy bills 4% lower than they would otherwise have been; and lower bills for businesses and energy intensive users, too.
I think The Energy Bill is good for business, good the country, good for consumers, and good for the environment. It can help ensure Britain stays competitive – and nurture the green businesses which drove a third of the growth in our economy last year.
Ed Davey is Secretary of State for Energy and Climate Change
Response: Robert Gross, Co-Director, Technology & Policy Assessment, UK Energy Research Centre (UKERC)
These reforms set out to make investment in UK energy more attractive. However the pace of the reform process has been slow and investors remain cautious. The devil is in the detail of this complicated bill. UKERC’s consultation of experts warned of the Bill’s excess complexities and unintended consequences. One example is that the Bill risks making the market more difficult for smaller players in the renewable energy sector. Davey believes he can fix this and in principle probably can. But it is essential that the government creates a credible counterparty for contracts, ensures access for independent generators and reassures investors that Treasury rules won’t undermine the Bill’s long term contracts. Industry commentators make clear that government commitment to the Bill’s goals are at least as important as the detail in the Bill. If carbon targets are the goal the Bill needs to be explicit that this is the case.
Response: David Workman, Director General of the Confederation of Paper Industries (CPI)
Industry needs energy supplies to be secure but internationally competitive. No mention is made about the latter. With gas prices in the USA now at a quarter of what UK Industry is paying we need to put affordability at the forefront of our thinking. The very fact that we are going to need to build backup facilities for wind generation is an unnecessary cost.
How many of the green jobs are going to be subsidised and therefore not sustainable in the long term?
The Department for Business, Innovation and Skills (BIS) recently published a report which showed quite graphically that UK energy costs will rise significantly between now and 2020, and to a level that will make UK Energy Intensive Manufacturing uncompetitive.
If government is going to continue to pursue a renewables agenda then it needs to adequately compensate the Energy Intensive Industries or face losing large parts of manufacturing.
Energy policy needs to be a part of a broader Industrial policy.
Response: Keith Parker, Chief Executive of the Nuclear Industry Association
Keeping the lights on, bills down and the air clean is nuclear in a nutshell. The proposals put forward in the draft Energy Bill are a vital step towards providing the credible means with which the UK will meet three pivotal energy responsibilities: future affordability, energy security and reducing emissions. The Nuclear Industry Association will continue to support measures that attract low-carbon investment in the United Kingdom.
RenewableUK, the trade and professional body representing the wind, wave and tidal energy sectors, welcomed the fact that Mr Davey has highlighted the key role for renewables in the UK’s energy portfolio. The Secretary of State also warned against an over-reliance on gas, noting that “the consensus is that gas prices will either remain high, or go higher, as global gas prices rose by 40% last year”. He also stated that unconventional gas would not make as big a difference as some reports had suggested, as shale gas wouldn’t be extractable at any scale for years to come.
RenewableUK’s Director of Policy, Dr Gordon Edge commented, “The renewables sector welcomes the Energy Secretary’s common sense approach on meeting our energy needs in the years ahead. It’s widely recognised that onshore wind is the cheapest way to deliver low-carbon electricity at scale. This is a sensible way to shield consumers from the fluctuations and price shocks of fossil fuels. We trust that the rest of Government shares this evidence-based standpoint”.
Response: Leonie Greene, Head of External Affairs at the Renewable Energy Association
The REA welcomes the Secretary of State’s comments today. Gas has a potentially complementary role to play alongside renewables but the Secretary of State is right that gas is an increasingly volatile commodity and its role must be consistent with meeting both carbon and renewable energy targets. We look forward to continuing to work with DECC to iron out the issues with the Energy Bill to ensure that the renewables industry can make a stronger contribution to the Government’s policy objectives: low carbon energy, security of supply and economic growth.